The Fragility of Commitment

17 Pages Posted: 20 Feb 2011

See all articles by John Morgan

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Felix Várdy

International Monetary Fund (IMF)

Date Written: February 19, 2011

Abstract

We show that the value of commitment in many standard games is fragile. Specifically, when the second mover faces a small cost to observe the …first mover's action, equilibrium payoffs are identical to the case where observation is in…finitely costly or the first mover's actions are completely unobservable. Applications of our result include standard Stackelberg-Cournot and differentiated product Bertrand games, as well as forms of commitment highlighted in Bolton and Scharfstein (1990) and Bulow, Geanakoplos, and Klemperer (1985).

Keywords: Cournot, Bertrand, Stackelberg, Observation Cost, Value of Commitment, First-Mover Advantage, Second-Mover Advantage, Costly Leader Game

JEL Classification: C72, D83, L13

Suggested Citation

Morgan, John and Várdy, Felix, The Fragility of Commitment (February 19, 2011). Available at SSRN: https://ssrn.com/abstract=1764742 or http://dx.doi.org/10.2139/ssrn.1764742

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

Felix Várdy (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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